I'm the Founder and Managing Partner of Ironfire Capital LLC, which runs a tech-focused hedge fund and angel fund. I did a Ph.D. in Management at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management. You can follow me on Twitter @ericjackson, subscribe to me on Facebook, follow me on Sina Weibo, or Circle me on Google+. My email is: dr.eric.jackson@me.com

Is Alibaba's Growth Really Slowing?

The implication of the article is that it would advantage Alibaba with a lower valuation at the time of the IPO, when they will be buying back part of Yahoo’s stake.

This all dates back to two years ago when former Yahoo CEO Scott Thompson got his board to sell down a 40% share in Alibaba to 24%. At the time, Thompson agreed that Alibaba was worth a valuation of $35 billion. Today, some Wall Street analysts think it’s worth $190 billion.

Yahoo and Alibaba also agreed that, at the time of the IPO, Yahoo will sell down its 24% stake in Alibaba to 14%. An earlier version of this article implied that it will be Jack Ma and his management team who will personally buy those shares. This is not the case. It will be Alibaba corporate who will take over the 10% stake from Yahoo.

Yahoo will have to sell the stake for whatever the IPO price is – agreed to by the underwriters – for Alibaba at the time. If Alibaba is slowing its growth, shouldn’t that be to their advantage since they have to pay less for a stake — for example, $10 billion for a 10% stake of a $100 billion valuation versus $20 billion for a 10% stake of a $200 billion valuation?

Alibaba thinks this theory is complete nonsense. They reached out to me to clarify several items.

Firstly, they question the original source quoting Jack Ma. They pointed out that it often happens in the Chinese press that articles can simply be poorly sourced, misinterpreted, or even deliberately wrong. The entire original article was built around the premise that Alibaba faced many “obstacles” on the road to its IPO.

The specific passage suggesting Jack Ma was urging a slowing of growth was, according to Alibaba, nothing more than a typical Jack Ma stump speech to the troops arguing for them not to make customers angry by pumping up profits today which could then hurt the company in the long-run. He always coaxes his workers to build for long-term and stable growth.

Alibaba says it is focused on running its business, not slowing it down. China is so dynamic that market leaders who stop and focus on themselves instead of serving their customers are quickly forced out of business. That’s how Alibaba rose to prominence in China: serving its customers while eBay (EachNet) was too busy focused on its own policies and procedures.

Alibaba also thinks it’s silly to suggest they will under-price the IPO, because this argument forgets that they will also be selling a block of shares to the public that will dilute all shareholders including them, Softbank, and Yahoo unless they sold fewer shares to the public than what they will buy back from Yahoo (which is unlikely).

So, the open question remains why did Alibaba’s revenues “only” grow 2% sequentially from Q2 to Q3 (which seemed to upset so many on Wall Street)?

The answer could be as simple as no reason at all.

The time of year from Q2 and Q3 has never really been a big growth time historically for Alibaba. Two years ago, Alibaba showed 9% top line growth over this period — on a smaller base. Last year, they showed 5% growth. And this year was 2% (although the 2013 Q2 revenue number was higher than the 2012 Q2 revenue number).

The big question will be how did Alibaba do in its Q4, which has already ended but won’t be reported by Yahoo until April. There have been some hints already that Alibaba saw enormous gains over the 11/11 and 12/12 shopping days. The proof will be in the financial results.

And, when those numbers come out in April, we might all think back and be surprised that public investors reacted so negatively to Yahoo’s and Softbank’s stock prices the day after the Q3 numbers were released.

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